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Arrow Beats on Q1 Earnings, Misses Rev

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Arrow Electronics Inc. (ARW - Analyst Report) reported first-quarter 2014 adjusted earnings (excluding the effect of restructuring and amortization) per share of $1.22, which beat the Zacks Consensus Estimate by a penny. On a year-over-year basis, earnings increased 27.9%, primarily due to growth across its business segments. Reported earnings also came within management’s guided range of $1.14 and $1.26 per share.

Quarter Details

Arrow’s revenues on a reported basis came in at $5.08 billion, which increased 4.8% from the year-ago quarter. On an adjusted basis, revenues decreased 1.4% from the year-ago quarter and also came in at $5.08 billion, which missed the Zacks Consensus Estimate of $5.32 billion. The company’s book-to-bill ratio was 1.04.

On a segmental basis, revenues from Global components increased 7.2% on a year-over-year basis to $3.42 billion. Adjusted revenues increased 4.4% from the year-ago quarter and also came in at $3.42 billion. Revenues from America increased 1.0% while Asia-Pacific revenues increased 12.0%, primarily due to strong growth in China. European revenues, on an adjusted basis, increased 7.0% on a year-over-year basis, which boosted segment revenues.

Revenues from Global enterprise computing solutions (ECS) came in at $1.66 billion, up a marginal 0.2% on a year-over-year basis, primarily due to increased demand for software and security-related solutions, partially offset by a tepid hardware business. Adjusted revenues decreased 11.4% from the year-ago-quarter. Revenues were impacted by low demand in Arrow’s storage and servers business globally. Revenues from America declined 10.0% while revenues from Europe declined 11.0% on an adjusted basis. However, sales from Europe on a reported basis were up 15.0% year over year, primarily due to the Computerlinks acquisition.

Arrow reported adjusted operating margin of 3.9%, which was up 47 basis points (bps) from the year-ago quarter primarily due to growth across its businesses. Adjusted operating expenses increased 6.2% from the year-ago quarter to $503.5 million and were up 14 bps as a percentage of revenues for the same period of time.

Arrow’s adjusted net income (excluding the effect of restructuring and amortization) came in at $124.0 million or $1.22 per share compared with $103.1 million or 96 cents in the year-ago quarter.

Arrow ended the quarter with cash and cash equivalents of $258.3 million, down from $390.6 million at the end of the previous quarter. Long-term debt was $2.14 billion, down from $2.23 billion at the end of the previous quarter. During the quarter, the company generated $124.0 million in cash from operations. During the quarter, Arrow repurchased shares worth $70.0 million.

Guidance

For the second quarter of 2014, Arrow expects sales to range between $5.45 billion and $5.85 billion (mid pint $5.65 billion), reflecting a sequential increase in revenues. The Zacks Consensus Estimate is pegged at $5.72 billion.

Global components sales are projected between $3.45 billion and $3.65 billion. Global enterprise computing solutions sales are estimated between $2.0 billion and $2.2 billion. The company expects non-GAAP earnings to range between $1.35 and $1.47, up sequentially. The Zacks Consensus Estimate of $1.41 per share is line with the mid-point of the guided range.

Management expects its enterprise computing solutions business to boost revenues. Moreover, the company expects its global components business to remain at par on a sequential basis in the second quarter.

Our Take

Electronic component distributor Arrow posted mixed first-quarter results, with the bottom line surpassing the Zacks Consensus Estimate but revenues missing the same. Year-over-year comparisons were modestly up and Arrow had a favorable book to bill ratio. Moreover, positive commentary about enhanced productivity, annual cost savings, and continued higher contributions from Europe are encouraging. Moreover, incremental sales from strategic acquisitions such as that of Computerlinks are expected to boost Arrow’s top line going forward.

We believe that Arrow’s core strength of providing best-in-class services and easy-to-acquire technologies are expected to bolster its growth in the future.

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